IN THE UNITED STATES DISTRICT COURTFOR THE SOUTHERN DISTRICT OF TEXAS

HOUSTON DIVISION

IN RE COBALT INTERNATIONAL §ENERGY, INC. SECURITIES § CIVIL ACTION NO. H-14-3428LITIGATION §

MEMORANDUM AND ORDER

This securities case is before the Court on the Motion to Dismiss [Doc. # 81]

filed by Defendants Goldman, Sachs & Co. (“Goldman Sachs”), Morgan

Stanley & Co. LLC, Credit Suisse Securities (USA) LLC, Citigroup Global Markets

Inc., J.P. Morgan Securities LLC, Tudor, Pickering, Holt & Co. Securities, Inc.,

Deutsche Bank Securities Inc., RBC Capital Markets, LLC, UBS Securities LLC,

Howard Weil Incorporated, Stifel, Nicolaus & Company, Incorporated, Capital One

Southcoast, Inc., and Lazard Capital Markets LLC (collectively, “Underwriter

Defendants”).1 Also pending is the Motion to Dismiss [Doc. # 82] filed by

Defendants Goldman Sachs Group, Inc., Riverstone Holdings LLC (“Riverstone”),

First Reserve, and Kern Partners Ltd. (“Kern”) (collectively together with The Carlyle

1 Plaintiffs GAMCO Global Gold, Natural Resources & Income Trust, GAMCONatural Resources, Gold & Income Trust, St. Lucie County Fire District Firefighters’Pension Trust Fund, Fire and Police Retiree Health Care Fund, San Antonio, SjundeAP-Fonden, and Universal Investment Gesellschaft m.b.H. filed an Opposition [Doc.# 89], and the Underwriter Defendants filed a Reply [Doc. # 97].

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United States District CourtSouthern District of Texas

ENTEREDJanuary 19, 2016

David J. Bradley, Clerk

St. Lucie County Fire District Firefighters' Pension Trust Fund et al v. Bryant et al Doc. 108

Dockets.Justia.com

Group, L.P., “Control Defendants”), in which Defendant The Carlyle Group, L.P.

(“Carlyle”) joined [Doc. # 84].2 Cobalt International Energy, Inc. (“Cobalt”), Joseph

H. Bryant, James W. Farnsworth, John P. Wilkirson, Peter R. Coneway, Henry

Cornell, Jack E. Golden, N. John Lancaster, Jon A. Marshall, Kenneth W. Moore,

J. Hardy Murchison, Michael G. France, Kenneth A. Pontarelli, Scott L. Lebovitz,

Myles W. Scoggins, D. Jeff van Steenbergen, Martin H. Young, Jr., and William P.

Utt (collectively, the “Cobalt Defendants”) filed a separate Motion to Dismiss [Doc.

# 83], to which Plaintiffs filed an Opposition [Doc. # 88], and the Cobalt Defendants

filed a Reply [Doc. # 98].

The Court has reviewed the full record, including Plaintiffs’ Consolidated

Amended Class Action Complaint (“Complaint”) [Doc. # 72]. Based on this review,

and the application of relevant legal authorities, the Court grants in part and denies

in part the pending Motions to Dismiss.

I. BACKGROUND

Cobalt is an exploration and production company that was formed in 2005 as

a private company. Defendant Joseph H. Bryant, Goldman Sachs, and Riverstone

founded the company, which was incorporated in the state of Delaware. Cobalt

2 Plaintiffs filed an Opposition [Doc. # 90], and the Control Defendants filed a Reply[Doc. # 95], in which Defendant Carlyle joined [Doc. # 96].

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conducted an initial public offering (“IPO”) of its shares in December 2009. At the

time of the IPO, Bryant was Cobalt’s Chief Executive Officer (“CEO”) and Chairman

of Cobalt’s Board of Directors.

In 2007, Cobalt entered into an agreement with Sonangol E.P. (“Sonangol”),

the Angolan national oil company, to acquire a 40% interest in oil exploration

Blocks 9, 20, and 21 in offshore Angola. In 2009, the Angolan Parliament issued two

decrees assigning an interest in the Blocks to Nazaki Oil & Gaz (“Nazaki”), Sonangol

P&P, and Alper Oil, Limitada (“Alper”). In February 2010, Cobalt and these other

companies signed Risk Services Agreements (“RSAs”) with Sonangol.

On January 4, 2011, Cobalt filed a Registration Statement and Prospectus

(“January 2011 Registration Statement”) with the Securities and Exchange

Commission (“SEC”). Based on this 2011 Registration Statement, Cobalt conducted,

inter alia, a stock offering in late February 2012 (“February 2012 Stock Offering”)

and a bond offering in December 2012 (“2012 Bond Offering”).

On March 10, 2011, Cobalt learned that the SEC was conducting an informal

inquiry into allegations that there existed a connection between Nazaki and senior

government officials in Angola. The next day, Cobalt contacted the Department of

Justice (“DOJ”) regarding the same allegations. Both the SEC and the DOJ began

formal investigations into whether Cobalt had violated the Foreign Corrupt Practices

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Act of 1977 (“FCPA”). The SEC investigation terminated in January 2015 with no

recommendation for enforcement action against Cobalt. The DOJ investigation

remains ongoing.

Meanwhile, Cobalt drilled two exploration wells in the offshore Angola drilling

region: Lontra on Block 20 and Loengo on Block 9. Cobalt had no rights to gas

discoveries and, instead, had rights only to any oil that was discovered in the Blocks.

Ultimately, Lontra was found to contain a substantially higher percentage of gas than

originally estimated, and drilling at Loengo failed to discover oil.

On November 30, 2014, Plaintiffs St. Lucie County Fire District Firefighters’

Pension Trust Fund (“St. Lucie”) and Fire and Police Retiree Health Care Fund, San

Antonio (“San Antonio”), who each purchased Cobalt securities, filed a Complaint

[Doc. # 1] alleging violations of the Securities Exchange Act of 1934 (“Exchange

Act”) and the Securities Act of 1933 (“Securities Act”). On December 5, 2014,

Steven Neuman, a purchaser of Cobalt securities, filed a Complaint [Doc. # 1 in Civil

Action No. H-14-cv-3488], alleging violations of the Securities Act and the Exchange

Act. By Order [Doc. # 67] entered March 3, 2015, the Court consolidated the two

civil cases. By Order [Doc. # 68] entered the same day, the Court appointed GAMCO

Global Gold, Natural Resources & Income Trust and GAMCO Natural Resources, Gold &

Income Trust (collectively, “GAMCO”) as lead Plaintiffs in the consolidated cases.

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On May 1, 2015, Plaintiffs filed their Consolidated Amended Class Action

Complaint (“Complaint”) [Doc. # 72]. Plaintiffs allege in Count I of their Complaint

that Cobalt and its executives violated Section 10(b) of the Exchange Act and

Rule 10b-5. In Count II, Plaintiffs allege that Cobalt and its executives violated

Section 20(a) of the Exchange Act. Plaintiffs assert in Count III a claim under Section

11 of the Securities Act against Cobalt, its directors, and the Underwriter Defendants.

In Count IV, Plaintiffs assert a claim against the Control Defendants under Section 15

of the Securities Act. In Count V, Plaintiffs assert a claim against the Underwriter

Defendants under Section 12(a)(2) of the Securities Act.

Defendants filed their Motions to Dismiss. All Defendants seek dismissal of

all claims against them. The Motions to Dismiss have been fully briefed and are now

ripe for decision.

II. APPLICABLE LEGAL STANDARDS

A. Pleading Standard for Motion to Dismiss

A motion to dismiss under Rule 12(b)(6) of the Federal Rules of Civil

Procedure is viewed with disfavor and is rarely granted. Turner v. Pleasant, 663 F.3d

770, 775 (5th Cir. 2011) (citing Harrington v. State Farm Fire & Cas. Co., 563 F.3d

141, 147 (5th Cir. 2009)). The complaint must be liberally construed in favor of the

plaintiff, and all facts pleaded in the complaint must be taken as true. Harrington, 563

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F.3d at 147. The complaint must, however, contain sufficient factual allegations, as

opposed to legal conclusions, to state a claim for relief that is “plausible on its face.”

See Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009); Patrick v. Wal-Mart, Inc., 681 F.3d

614, 617 (5th Cir. 2012). When there are well-pleaded factual allegations, a court

should presume they are true, even if doubtful, and then determine whether they

plausibly give rise to an entitlement to relief. Iqbal, 556 U.S. at 679.

Except as explained below regarding the special pleading requirements for two

elements of a § 10(b) claim, these pleading requirements apply to Plaintiffs’ claims

in this case. See Kapps v. Torch Offshore, Inc., 379 F.3d 207, 210 (5th Cir. 2004)

(“Section 11 only requires notice pleading under FED. R. CIV. P. 8 rather than the

detailed pleading mandated by FED. R. CIV. P. 9(b) or the Private Securities Litigation

Reform Act”); In re Kosmos Energy Ltd. Sec. Litig., 955 F. Supp. 2d 658 (N.D. Tex.

2013).

B. Special Pleading Requirements for § 10(b) Claims

The basic elements of a § 10(b) claim involving publicly traded securities are:

(1) a material misrepresentation or omission, (2) in connection with the purchase or

sale of a security, (3) scienter by the defendant, (4) justifiable reliance by the plaintiff,

(5) damages; and (6) a causal connection between the material misrepresentation and

the loss, referred to a “loss causation.” See Lormand v. US Unwired, Inc., 565

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F.3d 228, 238-39 (5th Cir. 2009). The Private Securities Litigation Reform Act

(“PSLRA”) imposes a heightened pleading requirement for two elements of a § 10(b)

claim – the misrepresentation and scienter elements. See Owens v. Jastrow, 789 F.3d

529, 535 (5th Cir. 2015) (citing 15 U.S.C. § 78u–4; Tellabs, Inc. v. Makor Issues &

Rights, Ltd., 551 U.S. 308, 321 (2007)). Specifically, “the PSLRA requires a plaintiff

to identify each allegedly misleading statement with particularity and explain why it

is misleading, the so-called ‘particularity’ requirement.” Lormand, 565 F.3d at 239

(citing 15 U.S.C. § 78u–4(b)(1)).

Additionally, the PSLRA requires a plaintiff to allege facts “giving rise to a

strong inference that the defendant acted with the required state of mind.” Id. (quoting

15 U.S.C. § 78u–4(b)(2)). To satisfy the pleading standard for the required “strong

inference” of scienter, the allegations must create an inference of scienter that is “at

least as compelling as any opposing inference one could draw from the facts alleged.”

Owens, 789 F.3d at 536 (quoting Tellabs, 551 U.S. at 324). “[A] tie favors the

plaintiff.” Id. (quoting Lormand, 565 F.3d at 254).

III. COBALT DEFENDANTS’ MOTION TO DISMISS

A. “Foundational Infirmities”

The Cobalt Defendants argue that the allegations in the Complaint should be

“deeply discounted because of their dubious origins.” See Cobalt Defendants’

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Motion, p. 20. Specifically, the Cobalt Defendants ask the Court to disregard

allegations based on information from confidential witnesses and various published

articles. The Cobalt Defendants argue also that Plaintiffs engaged in “selective

editing” of the documents on which they base their claims.

Courts often discount allegations from confidential sources. See, e.g., Ind. Elec.

Workers’ Pension Trust Fund v. Shaw Group, Inc., 537 F.3d 527, 535 (5th Cir. 2008).

In this case, however, the confidential witnesses not identified by name are adequately

identified in other ways and the basis for their knowledge is set forth in the Complaint.

For example, two of the confidential witnesses are Cobalt’s Chief Financial Officer

(“CFO”) and Executive Vice President from June 2009 to June 2010, and its Chief

Information Officer (“CIO”) from June 2012 to April 2014. Another was the

executive administrative assistant for Cobalt’s West Africa division from April 2010

to March 2015, who reported to Richard Smith (at the relevant time, Cobalt’s Country

Manager for Angola and Vice President, International Business Development,

Commercial and Finance) for her first two years at Cobalt, and to Michael Drennon

(Cobalt’s Executive Vice President and General Manager Angola) throughout her

tenure at Cobalt. These witnesses may be confidential to the extent that their names

are not included in the Complaint, but they are neither anonymous nor secret. The

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allegations in the Complaint based on knowledge obtained from these witnesses will

not be discounted, deeply or otherwise.

Plaintiffs identify and cite to several articles which the Cobalt Defendants argue

lack reliability. The cited articles relate primarily to the issue regarding Cobalt’s

alleged knowledge that Nazaki and Alper were owned by Angolan governmental

officials, providing one source of evidentiary support for the allegations. Plaintiffs

allege other bases, however, for their claim that the Cobalt Defendants made false or

misleading statements. The content of the articles is properly alleged and the accuracy

of the articles is not a proper subject for a motion to dismiss.

The Cobalt Defendants argue also that Plaintiffs selectively edited certain

statements, and that the editing “casts even further doubt on Plaintiffs’ claims.” See

Cobalt Defendants’ Motion, p. 25. The pleading stage, however, is not the time to

consider whether Plaintiffs’ allegations should be doubted. The only issue is whether

Plaintiffs’ allegations in the Complaint satisfy the pleading requirements of the

Federal Rules of Civil Procedure and the PSLRA.

B. Allegations of False or Misleading Statements

The Cobalt Defendants argue that Plaintiffs’ § 10(b) and § 11 claims should be

dismissed for failure to allege a false or misleading statement. As noted above, an

essential element of a § 10(b) claim is that the defendant made a material statement

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that was false or misleading. See Lormand, 565 F.3d at 238. The only elements of

a § 11 claim are: (1) an omission or misrepresentation of (2) a material fact required

to be stated or necessary to make other statements not misleading. See Krim v.

BancTexas Group, Inc., 989 F.2d 1435, 1445 (5th Cir. 1993); see also In re Franklin

Bank Corp. Sec. Litig., 782 F. Supp. 2d 364, 379 (S.D. Tex. 2011). A fact is

“material” if “a reasonable investor would consider [it] significant in the decision

whether to invest, such that it alters the total mix of information available about the

proposed investment.” Krim, 989 F.2d at 1445.

Nazaki and Alper.– Plaintiffs adequately allege with particularity that the

Cobalt Defendants, through corporate filings and through statements during investor

conference calls, misrepresented their knowledge that Angolan government officials

owned Nazaki and Alper. Plaintiffs allege also that the Cobalt Defendants, in Cobalt’s

2011 Form 10-K and otherwise, falsely represented that Nazaki was “a full paying

member” of the partnership with Cobalt.3

Plaintiffs allege that an attorney in the United States conducted an investigation

in 2008 and “was told that” Nazaki was controlled by Angolan government officials.

3 The Cobalt Defendants argue that “full paying member” did not mean a member whohad paid anything but, instead, described Nazaki’s interests in the Angolan blocks as“non-carried.” See Cobalt Defendants’ Motion [Doc. # 83], p. 40. While thisargument may be relevant to a motion for summary judgment, it does not indicate thatPlaintiffs have failed to allege false and misleading statements to support their claimsunder the Securities Act and the Exchange Act.

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Plaintiffs allege that it had been publicly reported as early as the first half of 2010 that

Nazaki was controlled by an Angolan General. Plaintiffs allege that the Global

Witness reported in May 2010 that “top Angolan officials” might be using Nazaki and

Alper as fronts for the officials’ own private benefit. Plaintiffs allege that, in response

to the Global Witness report, the Cobalt Defendants denied the allegations and

claimed they were unaware of any connection between Nazaki and any senior

Angolan government officials. Plaintiffs allege that, even after the Financial Times

reported in April 2012 that the three senior Angolan officials admitted their ownership

of Nazaki, the Cobalt Defendants said they had refuted any allegations of wrongdoing

and had conducted rigorous due diligence on the issue of Nazaki’s ownership

beginning in 2007.

These and many other allegations in the Complaint satisfy the PSLRA

requirements for pleading a false or misleading representation regarding a material

matter – the ownership of Nazaki and Alper and whether Nazaki was a “full paying

member” of the partnership.

Longra and Loengo Wells.– Plaintiffs adequately allege with particularity that

the Cobalt Defendants through corporate filings and through statements during

investor conference calls misrepresented their knowledge regarding the Longra and

Loengo wells. Plaintiffs allege that the Cobalt Defendants described the two wells in

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the offering materials for the January 2013 and May 2013 stock offerings as “large

[and] oil-focused.” Plaintiffs allege that the Cobalt Defendants throughout 2013

described Lontra as a “super-size prospect” with oil potential greater than a billion

barrels. Plaintiffs allege that Cobalt’s Chief Exploration Officer, Defendant

Farnsworth, falsely stated in October 2013 that Lontra was “not the big gas field” but

was, instead, “an oil field” that was “a significant discovery.” Plaintiffs allege that the

Cobalt Defendants made these representations knowing that Lontra was primarily gas,

to which Cobalt had no rights, and that there was “not even a remote chance” of

success in the Loengo well.

Forward-Looking Statements.– The Cobalt Defendants argue also that certain

statements regarding the Angolan wells are protected by the PSLRA’s Safe Harbor

clause as forward-looking. Under the Safe Harbor clause, a forward-looking

statement is not actionable if: (1) it is identified as forward-looking and is

accompanied by “meaningful cautionary statements identifying important factors that

could cause actual results to differ materially;” (2) it is immaterial; or (3) the plaintiff

fails to plead that the forward-looking statement was made with actual knowledge

that it was false or misleading. See Lormand, 565 F.3d at 243 (citing 15 U.S.C.

§ 78u–5(c)(1)(A), (B); Southland Sec. Corp. v. INSpire Ins. Solutions, Inc., 365

F.3d 353, 371-72 (5th Cir. 2004)). “Whether or not a statement is forward-looking

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is governed by the nature of the statement, not a litigant’s allegations about the

statement.” KB Partners I, L.P. v. Pain Therapeutics, Inc., 2015 WL 7760201, *10

(W.D. Tex. Dec. 1, 2015).

Many court have held that the Safe Harbor clause does not protect statements

when the plaintiff adequately alleges that the defendant knew his statements were

misleading when made. See, e.g., Lormand, 565 F.3d at 244 (“Because the plaintiff

adequately alleges that the defendants actually knew that their statements were

misleading at the time they were made, the safe harbor provision is inapplicable to all

alleged misrepresentations.”); Marcus v. J.C. Penney Co., Inc., 2015 WL 5766870,

*2 (E.D. Tex. Sept. 29, 2015). Plaintiffs in this case clearly allege that the Cobalt

Defendants knew “fairly early on” that the Lontra well was producing primarily gas,

to which Cobalt had no rights, and knew by the end of 2013 that there was “not even

a remote chance” that the Loengo well would be successful. As a result, to the extent

a plaintiff’s allegation that the defendant knew that the statements were misleading

precludes application of the Safe Harbor clause, the Motion to Dismiss based on that

provision is denied.

Moreover, the Safe Harbor clause applies only when the alleged

misrepresentations are accompanied by “meaningful cautionary language.” See

Lormand, 565 F.3d at 244 (quoting 15 U.S.C. § 78u-5(c)(1)(A)(i)). “When risks have

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already begun to materialize, it is no longer sufficient to generally warn of the

possibility of these risks in the future.” Marcus, 2015 WL 5766870 at *3. “When

cautionary language is glossed over as a future risk rather than the certain dangers that

had already begun to materialize then the warnings are no longer meaningful.” Id.

(internal quotations and ellipsis omitted). In this case, the Cobalt Defendants note that

the statements regarding the Lontra and Loengo wells related to their “potential” and

“prospects.” Plaintiffs allege, however, that by the time the Cobalt Defendants made

the statements in 2012 and 2013 regarding the potential of the Lontra and Loengo

wells, these Defendants already knew that the wells had limited potential, and that the

risks that the Lontra well would be primarily gas and that the Loengo well would be

a “dry” well had already begun to materialize. As a result, Plaintiffs have adequately

alleged that the Safe Harbor provision does not apply to protect the “forward-looking”

statements.

Conclusion Regarding Material Misrepresentation Element.– Plaintiffs have

adequately alleged with particularity the factual basis for the material

misrepresentation element of their § 10(b) and § 11 claims.

C. Allegations of Scienter

Scienter is an element of Plaintiffs’ § 10(b) claim. “When analyzing a

complaint for scienter, a court must ‘assess all the allegations holistically,’ not in

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isolation.” Owens, 789 F.3d at 536 (quoting Tellabs, 551 U.S. at 326). Plaintiffs have

alleged, primarily based on information received from the confidential witnesses who

were Cobalt insiders, that the Cobalt Defendants knew that Nazaki was owned by

Angolan officials. Plaintiffs have similarly alleged, based on information from Cobalt

insiders, that the Cobalt Defendants knew “fairly early on” that Lontra was primarily

gas, to which Cobalt had no rights, and that there was “not even a remote chance” that

Loengo would be successful. Viewing all the factual allegations in the Complaint

holistically and not in isolation, the Court finds that Plaintiffs have alleged with

adequate particularity that the Cobalt Defendants acted with the requisite scienter.

D. Allegations of Loss Causation

The loss causation element of a § 10(b) claim under the PSLRA requires the

plaintiff to prove that the defendant’s act or omission caused plaintiff’s loss. See 15

U.S.C. § 78u–4(b)(4); Pub. Emp. Ret. Sys. of Miss. v. Amedisys, Inc., 769 F.3d 313,

320 (5th Cir. 2014). “For a complaint to adequately plead this requirement, it need

only set forth ‘a short and plain statement of the claim showing that the pleader is

entitled to relief’ and provide the defendant with ‘fair notice of what the plaintiff’s

claim is and the grounds upon which it rests.’” Amedisys, Inc., 769 F.3d at 320

(quoting Dura Pharm., Inc., v. Broudo, 544 U.S. 336, 341-42 (2005)). The plaintiff

“must allege that when the ‘relevant truth’ about the fraud began to leak out or

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otherwise make its way into the marketplace, it caused the price of the stock to

depreciate and, thereby, proximately caused the plaintiff’s economic harm.” Id.

(citing Lormand, 565 F.3d at 255 (citing Dura, 544 U.S. at 342)). “Loss causation in

fraud-on-the-market cases can be demonstrated circumstantially by (1) identifying a

corrective disclosure (a release of information that reveals to the market the pertinent

truth that was previously concealed or obscured by the company’s fraud); (2) showing

that the stock price dropped soon after the corrective disclosure; and (3) eliminating

other possible explanations for this price drop, so that the factfinder can infer that it

is more probable than not that it was the corrective disclosure – as opposed to other

possible depressive factors – that caused at least a ‘substantial’ amount of price drop.”

Id. at 320-21 (internal quotations and citations omitted).

In this case, Plaintiffs have alleged that the Cobalt Defendants misrepresented

their knowledge of the connection between Nazaki and senior government officials

in Angola, and misrepresented their knowledge regarding the Lontra and Loengo

wells. Plaintiffs have alleged that when Cobalt issued corrective disclosures on

December 1, 2013, admitting that Lontra was primarily a gas-producing well, the

stock price fell more than 21% over the next two days. Plaintiffs have alleged that

when Cobalt issued corrective disclosures regarding the elevation of the SEC and DOJ

investigations regarding Nazaki’s ownership in August 2014, the stock price fell more

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than 11%. Similarly, Plaintiffs have alleged that when Cobalt disclosed in November

2014 that Loengo was a “dry well,” the stock price immediately declined 11.5% on

high volume trading. Based on Plaintiffs’ allegations in the Complaint, the factfinder

could reasonably infer that it is more probable than not that the corrective disclosures

caused at least a substantial portion of these episodes of price decline.

E. Allegations of Reliance

Reliance is an element of Plaintiffs’ § 10(b) claim. To invoke the presumption

of reliance based on a “fraud-on-the-market” theory, a plaintiff must allege, inter alia,

that the security traded in an efficient market. See Halliburton Co. v. Erica P. John

Fund, Inc., 134 S. Ct. 2398, 2408 (2014). “Efficiency is a relative concept, a matter

of degree.” In re Enron Corp. Sec., 529 F. Supp. 2d 644, 750 (S.D. Tex. 2006).

There is no challenge to Plaintiffs’ allegation that the market for Cobalt

common stock was an efficient one. The Cobalt Defendants argue that Plaintiffs

failed to allege reliance as to the December 2012 and May 2014 bond offerings.

Plaintiffs respond that the Cobalt bonds offered in December 2012 and May 2014

were convertible bonds and, therefore, their market price necessarily tracked that of

the common stock.4

4 In their Reply, the Cobalt Defendants argue that Plaintiffs do not allege that the bondsare convertible. In the Complaint, however, Plaintiffs clearly allege that the bonds

(continued...)

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Because the bonds were convertible to common stock, and because Plaintiffs

adequately alleged that there was an efficient market for the common stock, Plaintiffs

have alleged sufficient facts on the reliance factor for their § 10(b) claim as to the

bond offerings. See Argent Classic Convertible Arbitrage Fund L.P. v. Rite Aid

Corp., 315 F. Supp. 2d 666, 675 (E.D. Pa. 2004); Chu v. Sabratek Corp., 100 F.

Supp. 2d 815, 826 (N.D. Ill. 2000). The Cobalt Defendants’ Motion to Dismiss on

this basis is denied.

F. Control Person Liability

The Cobalt Defendants argue that the § 20 and § 15 control person liability

claims must be dismissed because Plaintiffs have failed to allege a primary claim

under § 10(b) and § 11. As explained above, however, Plaintiffs have adequately

alleged their § 10(b) and § 11 claims. Therefore, the § 20 and § 15 claims are not

subject to dismissal.

G. Conclusions On Cobalt Defendants’ Motion to Dismiss

The only issue before the Court at this time is whether the securities claims in

Plaintiffs’ Complaint are adequately alleged, not whether the claims are likely to

survive a motion for summary judgment following discovery. As discussed above,

4 (...continued)offered in the December 2012 Bond Offering (¶ 232) and in the May 2014 BondOffering (¶ 252) were convertible.

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Plaintiffs have adequately alleged their Securities Act and Exchange Act claims

against the Cobalt Defendants.

IV. UNDERWRITER DEFENDANTS’ MOTION TO DISMISS

Plaintiffs allege that the Underwriter Defendants violated Section 11 of the

Securities Act and Section 12(a)(2) of the Securities Act. Plaintiffs allege that each

of the Underwriter Defendants except Lazard Capital Markets, LLC (“Lazard”) served

as an underwriter for Cobalt’s February 2012 Stock Offering, that Goldman Sachs5

and Morgan Stanley & Co. LLC (“Morgan Stanley”) served as underwriters for the

December 2012 Bond Offering, that Morgan Stanley and Citigroup Global Markets

Inc. (“CGMI”) served as underwriters for the January 2013 Stock offering, that CGMI

served as an underwriter for the May 2013 Stock Offering, and that Goldman Sachs,

Credit Suisse Securities (USA) LLC (“Credit Suisse”), CGMI, RBC Capital Markets,

LLC (“RBC”), and Lazard served as underwriters for the May 2014 Bond Offering.

The Underwriter Defendants have moved to dismiss, asserting (1) that the

Securities Act claims based on the February 2012 Stock Offering are barred by the

three-year statute of repose; (2) that claims based on the statements regarding Nazaki

are barred by the one-year statute of limitations; (3) that Plaintiffs who purchased

5 Goldman Sachs is also sued as a Control Person pursuant to § 20 of the Exchange Act. Its Motion to Dismiss the § 20 claims against it will be addressed below with theControl Defendants’ Motions to Dismiss.

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shares after April 30, 2013, have failed to allege reliance in support of their § 11

claim, and (4) that Plaintiffs fail to allege that any of the Underwriter Defendants is

a “statutory seller” for purposes of the § 12 claim.6

A. Statute of Repose

Section 11 claims are subject to a three-year statute of repose which provides

that “[i]n no event” shall an action be brought “more than three years after the security

was bona fide offered to the public.” 15 U.S.C. § 77m. In this case, Cobalt stock was

“bona fide offered to the public” on February 23, 2012. St. Lucie County Fire District

Firefighters’ Pension Trust Fund (“St. Lucie”) and Fire and Police Retiree Health Care

Fund, San Antonio (“San Antonio”) filed an original class action complaint on

November 30, 2014, prior to the expiration of the three-year statute of repose. The

Underwriter Defendants argue that the November 2014 complaint does not prevent

dismissal based on the statute of repose. Specifically, the Underwriter Defendants

argue that neither of the two named Plaintiffs in the November 2014 complaint had

standing to assert a Securities Act claim based on the February 2012 Stock Offering

because neither Plaintiff purchased stock in that offering. As explained below,

6 The Underwriter Defendants argue also that Plaintiffs’ Securities Act claims shouldbe dismissed for failure to allege adequately a material statement that was false ormisleading. For the reasons discussed above in connection with the CobaltDefendants’ Motion to Dismiss, dismissal on this basis is denied.

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however, the allegations in the Complaint establish for present purposes that St. Lucie

had standing on November 30, 2014, to assert the Securities Act claim based on the

February 2012 Offering.

“Section 11 of the Securities Act, imposing civil liability for public offering of

securities pursuant to a false registration statement, permits ‘any person acquiring

such security’ to sue.” Krim v. pcOrder.com, Inc., 402 F.3d 489, 495 (5th Cir. 2005)

(citing 15 U.S.C. § 77k(a)). Section 11’s “standing provisions limit putative plaintiffs

to the narrow class of persons consisting of those who purchase securities that are the

direct subject of the prospectus and registration statement.” Id. (internal quotations

and citation omitted). The plain language of the statute confers standing on any

person who acquires a security issued under the registration statement that allegedly

contained an untrue statement of material fact, “so long as the security was indeed

issued under that registration statement and not another.” Id. (emphasis in original);

see also Hopson v. Chase Home Fin. LLC, 14 F. Supp. 3d 774, 783 (S.D. Miss. 2014)

(citing Krim’s holding that § 11 provides a right of action to any person acquiring

shares issued pursuant to an untrue registration statement); In re Citigroup Inc. Bond

Litig., 723 F. Supp. 2d 568, 584 (S.D.N.Y. 2010) (holding that if a registration

statement contains an untrue statement of material fact, “then any person acquiring a

security pursuant to that registration statement has standing to sue a variety of

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participants in the security’s issuance” and citing 15 U.S.C. § 77k(a)); In re Azurix

Corp. Sec. Litig., 198 F. Supp. 2d 862, 892 (S.D. Tex. 2002) (holding that the term

“any person acquiring such security” in § 77k(a) includes “purchasers of shares issued

and sold pursuant to the challenged registration statement”).

In this case, Plaintiffs allege that the February 2012 Stock Offering that is the

subject of the Underwriter Defendants’ statute of repose challenge, and the

December 2012 Bond Offering in which St. Lucie purchased Cobalt securities, were

both conducted pursuant to the same January 2011 Registration Statement and

Prospectus. See Complaint, ¶¶ 223, 233. “The point of Article III standing . . . is to

ensure that the named plaintiff has a personal stake in the outcome of the litigation and

that the plaintiff purchases ‘securities’ as that term is defined in the Act issued

pursuant to a particular registration statement.” In re Fleming Cos. Inc. Sec. &

Derivative Litig., 2004 WL 5278716, *49 (E.D. Tex. June 16, 2004). Although

reserving and not deciding the issue, the First Circuit in Plumbers’ Union Local No.

12 Pension Fund v. Nomura Asset Acceptance Corp., a case cited by the Underwriter

Defendants, stated in dicta that a plaintiff could have standing “where the claims of

the named plaintiffs necessarily give them – not just their lawyers – essentially the

same incentive to litigate the counterpart claims of the class members because the

establishment of the named plaintiffs’ claims necessarily establishes those of other

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class members.” Plumbers’ Union, 632 F.3d 762, 770 (2d Cir. 2011). In the

November 2014 complaint, St. Lucie, as a purchaser in the December 2012 Bond

Offering, challenged statements in the January 2011 Registration Statement on which

both the December 2012 Bond Offering and the February 2012 Stock Offering were

based. Therefore, St. Lucie had the same incentive to litigate its challenge to the

subject Registration Statement as those purchasers of Cobalt stock in the

February 2012 Stock Offering.

Here, St. Lucie purchased Cobalt securities in an offering pursuant to the same

registration statement as any purchasers of Cobalt securities in the February 2012

Offering.7 Because St. Lucie had standing to sue based on the January 2011

Registration Statement, it has standing to assert class-based claims for all purchasers

of securities pursuant to that Registration Statement. St. Lucie’s original complaint

was filed on November 30, 2014, less than three years after the February 2012

Offering and within the statute of repose under the Securities Act. The policy

concerns and the language of the applicable cases convince the Court that St. Lucie

7 Universal Investment Gesellschaft m.b.h., a named Plaintiff in the Complaint filedMay 1, 2015, alleges that it purchased shares of Cobalt stock in the February 2012Offering.

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had standing on November 30, 2014.8 The Underwriter Defendants’ Motion to

Dismiss claims based on the February 2012 Offering is, therefore, denied.

B. Statute of Limitations

The Underwriter Defendants argue that the claims relating to statements about

the Nazaki’s ownership are barred by the applicable statute of limitations. Claims

under the Securities Act must be filed “within one year after the discovery of the

untrue statement or the omission, or after such discovery should have been made by

the exercise of reasonable diligence.” 15 U.S.C. § 77m; Police & Fire Ret. Sys. of

City of Detroit v. IndyMac MBS, Inc., 721 F.3d 95, 107 (2d Cir. 2013); In re Magnum

Hunter Resources Corp. Sec. Litig., 616 F. App’x 442, 446-47 (2d Cir. June 23,

2015). “The one-year limitations period applicable to discovery of the violation

begins to run after the plaintiff obtains actual knowledge of the facts giving rise to the

action or notice of the facts, which in the exercise of reasonable diligence, would have

led to actual knowledge.” In re Petrobras Sec. Litig., __ F. Supp. 3d __, 2015 WL

4557364, *14 (S.D.N.Y. July 30, 2015) (quoting LC Capital Partners, LP v. Frontier

Ins. Grp., Inc., 318 F.3d 148, 154 (2d Cir. 2003)). Determining when a plaintiff has

sufficient information for the limitations period to begin is often fact specific and

8 As noted above, the GAMCO Plaintiffs, not St. Lucie, have been appointed LeadPlaintiffs in this case.

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inappropriate for a motion to dismiss pursuant to Rule 12(b)(6). LC Capital, 318 F.3d

at 156.

In this case, Plaintiffs allege that it was reported in an article in the Financial

Times in April 2012 that senior Angolan officials admitted their ownership of Nazaki.

Plaintiffs allege also, however, that Cobalt representatives immediately denied any

alleged wrongdoing and stated that they had conducted rigorous due diligence

regarding Nazaki’s ownership. Plaintiffs allege that, days later, Morgan Stanley

issued a report advising that it was reassured by Cobalt’s statements in response to the

Financial Times article. Therefore, the Court cannot conclude as a matter of law that

the statute of limitations began to run in April 2012. It may have been, as Plaintiffs

argue, that they did not have adequate information for the statute of limitations to

begin until August 2014, when Cobalt announced that Angola had terminated

Nazaki’s participation in the partnership with Cobalt. Because it is plausible that the

allegations in the Complaint could support a finding that the statute of limitations did

not begin to run until August 2014, the Court cannot conclude at this pleading stage

that the claims relating to Nazaki’s ownership are time-barred.

C. Section 11 Claim - Reliance

A plaintiff asserting a § 11 claim must allege (and eventually prove) reliance

on the misrepresentation in the registration statement if, and only if, the plaintiff

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“acquired the security after the issuer has made generally available to its security

holders an earning statement covering a period of at least 12 months beginning after

the effective date of the registration statement.” 15 U.S.C. § 77k(a). In this case,

Cobalt issued earnings statements between February 2012 and April 2013.9 The

Underwriter Defendants argue that, as a result, Plaintiffs who purchased Cobalt

securities after April 30, 2013, must allege reliance in support of their § 11 claim.

Plaintiffs argue first that Cobalt’s earning statements were not “earning

statements” for purposes of § 77k(a) because they continued to include the allegedly

false statements. The Court find this argument unpersuasive. The clear language of

the statute and the legislative history reflect that the term “earning statement” is

unqualified and should be given its general meaning. See Petrobras, 2015

WL 4557364 at *15; H.R. CONF. REP. NO. 73-1838, 1934 WL 1291, *41 (1934)

(explaining that the “basis of this provision is that in all likelihood the purchase and

price of the security purchased after publication of such an earning statement will be

predicated on that statement rather than upon the information disclosed upon

registration.”).

9 Specifically, Cobalt issued a Q2 2012 Form 10-Q on July 31, 2012, a Q3 2012 Form10-Q on October 30, 2012, a 2012 Form 10-K on February 26, 2013, and a Q1 2013Form 10-Q on April 30, 2013. This “combination of reports” may be considered an“earning statement” for purposes of § 77k(a). See 17 C.F.R. § 230.158(a)(2)(i).

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Plaintiffs argue also that they are entitled to rely on the “fraud-on-the-market”

theory of reliance to support their § 11 claim. Plaintiffs in the Complaint, however,

specifically allege that their reliance allegations, including those pertaining to the

“fraud-on-the-market” theory, “pertain only to Plaintiffs’ claim under the Exchange

Act.” See Complaint, ¶ 214.

Based on the current Complaint, Plaintiffs who purchased Cobalt securities

after April 30, 2013, must plead reliance on the alleged misrepresentations in issue,

in support of their § 11 claim. Having failed to do so, the § 11 claims of those

Plaintiffs are dismissed. The Court will, however, permit Plaintiffs to file a Second

Amended Consolidated Class Action Complaint by the deadline set forth below.

D. Section 12 Claim - Underwriter Defendants as “Statutory Sellers”

The Underwriter Defendants argue that Plaintiffs lack standing to assert their

§ 12 claim. Section 12(a)(2) imposes liability on anyone who “offers or sells a

security . . . by the use of any means or instruments of transportation or

communication in interstate commerce or of the mails, by means of a prospectus or

oral communication, which includes an untrue statement of a material fact.” 15

U.S.C. § 77l. Only persons who “directly purchase securities from the defendant in

a public offering, rather than on the secondary market,” have standing to assert a claim

under § 12(a)(2). See Gustafson v. Alloyd Co., Inc., 513 U.S. 561, 578 (1995).

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In this case, Plaintiffs adequately allege that they purchased their shares from

the Underwriter Defendants in the public offerings, rather than on a secondary market.

See Complaint, ¶¶ 312-316. As a result, dismissal of Plaintiffs’ § 12 claim against the

Underwriter Defendants is not appropriate and is denied.

E. Conclusion as to Underwriter Defendants’ Motion to Dismiss

Plaintiffs’ Securities Act claims against the Underwriter Defendants are not

subject to dismissal at this stage of the proceedings as barred by either the three-year

statute of repose or the one-year statute of limitations. As to those Plaintiffs who

purchased shares of Cobalt stock after April 30, 2013, they will be granted leave to

amend to allege reliance, if such allegations comply with the requirements of Rule 11

of the Federal Rules of Civil Procedure. Plaintiffs have adequately alleged that they

purchased their shares from the Underwriter Defendants in the public offerings and,

therefore, dismissal based on the allegations in the Complaint would be inappropriate.

Consequently, the Underwriter Defendants’ Motion to Dismiss is granted with leave

to replead as to the § 11 claim by Plaintiffs who purchased their Cobalt securities after

April 30, 2013, and is denied in all other respects.

V. CONTROL DEFENDANTS’ MOTION TO DISMISS

Plaintiffs allege that Goldman Sachs, Riverstone, Carlyle, First Reserve, and

Kern are liable as control persons under § 15 of the Securities Act for the violations

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of § 11 as alleged in the Complaint. Under § 15, any “person who, by or through

stock ownership, agency, or otherwise, . . . controls any person liable under [§ 11 of

the Securities Act], shall also be liable jointly and severally with and to the same

extent as such controlled person[.]” 15 U.S.C. § 77o. To state a § 15 claim for control

person liability, Plaintiffs must allege: (1) a primary violation of § 11 and/or § 12 of

the Securities Act; and (2) that the defendant exercised “control” over the primary

violator. See In re Dynegy, Inc. Sec. Litig., 339 F. Supp. 2d 804, 828 (S.D. Tex.

2004); see also In re Lehman Bros. Mortgage-Backed Sec. Litig., 650 F.3d 167, 185

(2d Cir. 2011); Howard v. Everex Sys., 228 F.3d 1057, 1065 (9th Cir. 2000).

By regulation, the SEC has defined “control” as the “possession, direct or

indirect, of the power to direct or cause the direction of management and policies of

a person, whether through ownership of voting securities, by contract, or otherwise.”

17 C.F.R. § 230.405. Control can also be established by “business relationships,

interlocking directors, family relations, or the power to influence and control the

activities of another.” In re Dynegy, 339 F. Supp. 2d at 828. A “plaintiff needs to

allege some facts beyond the defendant’s position or title that show the defendant had

actual power or control over the controlled person.” Id. (citing Dennis v. Gen.

Imaging, Inc., 918 F.2d 496, 509-10 (5th Cir. 1990)).

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There are no United States Supreme Court or Fifth Circuit decisions

establishing the pleading requirements for § 15. However, the Court finds persuasive

the reasoning of district courts in the Fifth Circuit that “apply a ‘relaxed’ and ‘lenient’

pleading standard for evaluating whether a plaintiff has sufficiently alleged a claim

for control person liability.” One Longhorn Land I, L.P. v. FF Arabian, LLC, 2015

WL 7432360, *2 (E.D. Tex. November 23, 2015) (citing Trendsetter Insurers, LLC

v. Hyperdynamics Corp., 2007 WL 172627, *15 (S.D. Tex. Jan. 18, 2007)). At the

pleading stage, “a plaintiff need only allege that [the defendant] possessed the power

to control the primary violator, not that control was exercised.” Id. at *3 (citing G.A.

Thompson & Co. v. Partridge, 737 F.2d 945, 957-58 (5th Cir. 1981)).

Whether a defendant is a control person is an intensely factual question, and

Plaintiffs here allege that Goldman Sachs, Riverstone, Carlyle, First Reserve, and

Kern together controlled Cobalt based, inter alia, on their significant stock ownership

and ability to elect a majority of Cobalt’s Board of Directors. Plaintiffs allege also

that the Control Defendants possessed the ability to control or influence Cobalt’s day-

to-day operation because a Stockholder Agreement gave them the right to select a

majority of the members of every Board Committee except the Audit Committee.

Plaintiffs allege that the Control Defendants, except Carlyle, had one or two Managing

Directors serving simultaneously as a member of Cobalt’s Board. This gave the

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Control Defendants the power to influence those interlocking directors and, thereby,

control or influence the Cobalt Board.

Plaintiffs also cite to statements by Cobalt in filings with the SEC. For

example, in the Form 10-K for the fiscal year ending December 31, 2010, Cobalt

stated that its “four largest stockholders collectively own approximately 72% of

[Cobalt’s] outstanding stock” and “have significant influence over all matters that

require approval by [the] shareholders, including election of directors and approval

of significant corporate transactions.” In the same SEC filing, Cobalt identified itself

as a “controlled company” in which “more than 50% of the voting power is held by

another person or group of persons acting together.” The Form 10-K identified First

Reserve, Goldman Sachs, Riverstone, Carlyle, and Kern as the entities controlling a

majority of voting power. The next Form 10-K, for fiscal year ending December 31,

2011, included similar statements.

As noted above, the determination of whether a defendant is a control person

is highly fact intensive. Plaintiffs and Control Defendants have cited a variety of

district court cases that hold the plaintiffs there have or have not adequately alleged

§ 15 liability. Each one is similar to this case in certain respects and dissimilar in

others. The issue is currently before this Court on Motions to Dismiss at the pleading

stage. The Court is reviewing only Plaintiffs’ allegations and expresses no opinion

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regarding what the evidence may ultimately show. The Court finds that although the

allegations in the Complaint regarding control liability are limited, particularly as to

Defendant Carlyle, the allegations are sufficient to satisfy the notice pleading

requirements of Rule 8 and the PSLRA.

VI. CONCLUSION AND ORDER

Based on the foregoing, it is hereby

ORDERED that the Underwriter Defendants’ Motion to Dismiss [Doc. # 81]

is GRANTED with leave to replead as to claims by Plaintiffs who purchased Cobalt

securities after April 30, 2013, and DENIED in all other respect. It is further

ORDERED that Plaintiffs shall file their Second Amended Class Action

Complaint by February 5, 2016. It is further

ORDERED that the Control Defendants’ Motion to Dismiss [Doc. # 82] is

DENIED. It is further

ORDERED that the Cobalt Defendants’ Motion to Dismiss [Doc. # 83] is

DENIED. It is further

ORDERED that Carlyle’s Motion to Dismiss [Doc. # 84] is DENIED.

SIGNED at Houston, Texas, this 19th day of January, 2016.

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